It
is an exciting time, as we’re at the beginning of the biggest product cycle in
the company’s history.In a week we ship
new versions of Visual Studio, SQL Server and BizTalk Server.Later this month we ship Xbox 360.Next year we have a double barreled release
of our two largest products with Windows Vista and Office “12”.It’s a great time for customers, our
partners, and for those at Microsoft who have put so much of themselves into
these products.

But we bring these innovations to market at a time of great
turbulence and potential change in the industry.This isn’t the first time of such great
change: we’ve needed to reflect upon our core strategy and direction just about
every five years.Such changes are
inevitable because of the progressive and dramatic evolution of computing and
communications technology, because of resultant changes in how our customers
use and apply that technology, and because of the continuous emergence of
competitors with new approaches and perspectives.

In 1990, there was actually a question about whether the
graphical user interface had merit. Apple amongst others valiantly tried
to convince the market of the GUI’s broad benefits, but the non-GUI Lotus 1-2-3
and WordPerfect had significant momentum.But Microsoft recognized the GUI’s transformative potential, and
committed the organization to pursuit of the dream – through investment in
applications, platform and tools – based on a belief that the GUI would
dramatically expand and democratize computing.

When we reflected upon our dreams
just five years later in 1995, the impetus for our new center of gravity came from
the then-nascent web. With a clear view upon the challenges and
opportunities it presented, the entire company pivoted to focus on the internet
to pursue that ‘fully connected’ dream with support for internet standards
throughout our product line: a web browser, server and development tools, and a
service in MSN that was transformed into a web portal.Many things we developed in that era continue
to fuel the growth of today’s internet: the technologies of AJAX – DHTML and XMLHTTP – were created in
1998 and used in products such as OWA.

In 2000, in the waning days of the
dot com bubble, we yet again reflected on our strategy and refined our
direction. After taking a more deliberative look at the internet and its
implications for software, we came to the conclusion that the internet would go
beyond browsing and should support programmability on a global scale. We observed
that certain aspects of our most fundamental platform – the tools and services
that developers use when building their software – would not likely satisfy the
emerging security and interoperability requirements of the internet. So
we embarked upon .NET, a transformative new generation of the platform and
tools built around managed code, the XML format and web services programming model.
At the time, it was a risky bet to build natively around XML, but this bet paid
off handsomely and .NET has become the most popular development environment in
the world.

It is now 2005, and the environment has changed yet again –
this time around services.Computing and communications technologies
have dramatically and progressively improved to enable the viability of a
services-based model.The ubiquity of
broadband and wireless networking has changed the nature of how people
interact, and they’re increasingly drawn toward the simplicity of services and
service-enabled software that ‘just works’.Businesses are increasingly considering what services-based economics of
scale might do to help them reduce infrastructure costs or deploy solutions as-needed
and on subscription basis.

Most challenging and
promising to our business, though, is that a new business model has emerged
in the form of advertising-supported services and software.This model has the potential to fundamentally
impact how we and other developers build, deliver, and monetize
innovations.No one yet knows what kind
of software and in which markets this model will be embraced, and there is
tremendous revenue potential in those where it ultimately is.

Just as
in the past, we must reflect upon what’s going on around us, and reflect upon
our strengths, weaknesses and industry leadership responsibilities, and
respond.As much as ever, it’s clear
that if we fail to do so, our business as we know it is at risk.We must respond quickly and decisively.

The
Landscape

Since
1995, inexpensive computing and communications technologies have advanced at a
rapid rate that even exceeded our expectations.It’s so very difficult now for us to imagine a world without the PC, the
web and the cell phone.In the US,
there are more than 100MM broadband users, 190MM mobile phone subscribers, and
WiFi networks blanket the urban landscape.This pattern is mirrored in much of the developed world.Computing has become linked to the
communications network; when a PC is purchased, it’s assumed that the PC will
have high-speed internet connectivity.At work, at home, in a hotel, at school or in a coffee shop, the
networked laptop has become our ‘virtual office’ where we file our information
and interact with others.The broad
accessibility and rapid pace of innovation in hardware, networks, software and
services has catalyzed a virtuous cycle whose pace isn’t slowing.There has never been a more exciting time to
be a developer or a user of technology.

Our products have embraced the internet in
many amazing ways. We’ve transformed the desktop into a rich platform for
interactive internet browsing, media and communications-centric
applications.We’ve transformed Windows
into best-of-breed infrastructure for internet applications and services.We’ve created, in .NET, the most popular
development platform in the world.We’ve
got amazing products in Office and our other IW offerings, having fully
embraced standards such as XML, HTML, RSS and SIP.Our MSN team has demonstrated great
innovation and has held its own in a highly competitive and rapidly changing
environment – particularly with Spaces and in growing a base of 180M active
Messenger users worldwide.The Xbox team
has also built a huge user community and has demonstrated that internet-based
“Live” interaction is a high-value, strong differentiator.

But for all our great progress, our efforts
have not always led to the degree that perhaps they could have.We should’ve been leaders with all our web
properties in harnessing the potential of AJAX,
following our pioneering work in OWA.We
knew search would be important, but through Google’s focus they’ve gained a
tremendously strong position.RSS is the
internet’s answer to the notification scenarios we’ve discussed and worked on
for some time, and is filling a role as ‘the UNIX pipe of the internet’ as
people use it to connect data and systems in unanticipated ways.For all its tremendous innovation and its
embracing of HTML and XML, Office is not yet the source of key web data formats
– surely not to the level of PDF.While
we’ve led with great capabilities in Messenger & Communicator, it was
Skype, not us, who made VoIP broadly popular and created a new category.We have long understood the importance of
mobile messaging scenarios and have made significant investment in device
software, yet only now are we surpassing the Blackberry.

And while we continue to make good progress
on these many fronts, a set of very strong and determined competitors is
laser-focused on internet services and service-enabled software.Google is obviously the most visible here,
although given the hype level it is difficult to ascertain which of their
myriad initiatives are simply adjuncts intended to drive scale for their
advertising business, or which might ultimately grow to substantively challenge
our offerings.Although Yahoo also has
significant communications assets that combine software and services, they are
more of a media company and – with the notable exception of their advertising
platform – they seem to be utilizing their platform capabilities largely as an
internal asset.The same is true of
Apple, which has done an enviable job integrating hardware, software and
services into a seamless experience with dotMac, iPod and iTunes, but seems
less focused on enabling developers to build substantial products and
businesses.

Even beyond our large competitors, tremendous
software-and-services activity is occurring within startups and at the
grassroots level.Only a few years
ago I’d have pointed to the Weblog and the Wiki as significant emerging trends;
by now they’re mainstream and have moved into the enterprise.Flickr and others have done innovative work
around community sharing and tagging based on simple data formats and
metadata.GoToMyPC and GoToMeeting are
very popular low-end solutions to remote PC access and online meetings.A number of startups have built interesting
solutions for cross-device file and remote media access.VoIP seems on the verge of exploding – not
just in Skype, but also as indicated by things such as the Asterisk
soft-PBX.Innovations abound from small
developers – from RAD frameworks to lightweight project management services and
solutions.

Many startups treat the ‘raw’ internet as
their platform.At the grassroots
level, such projects actively use standards such as vCards and iCal for sharing
contacts and calendars.Most all use RSS
in one way or another for data sharing.Remixing and mashing of multiple web applications using XML, REST and WS
is common; interesting mash-ups range from combining maps with apartment
listings, to others that place RSS feeds on top of systems and data not
originally intended for remixing.Developers needing tools and libraries to do their work just search the
internet, download, develop & integrate, deploy, refine.Speed, simplicity and loose coupling are
paramount.

And the work of these startups could be
improved with a ‘services platform’.Ironically,
the same things that enable and catalyze rapid innovation can also be
constraints to their success.Many hard
problems are often ignored – the most significant of which is achieving
scale.Some scale issues are
technological and result from the fact that they are generally built on
application server platforms rather than high-scale service platforms.But new services also need to build user
communities from scratch – generally by word of mouth.Many fund their sites using syndicated ads,
but have a difficult time transforming their services into higher levels of
commerce.Some seek to incorporate
client software into their user experience, but then need to reinvent software
deployment, update, communications and synchronization mechanisms.User identity and cross-service
interoperability mechanisms are still needlessly fragmented.Intuitively there seems to be a platform
opportunity in providing such capabilities to developers in a form that retains
the speed, simplicity and loose coupling that is so very important for rapid
innovation.

Key Tenets

Today there are three key tenets that are driving fundamental
shifts in the landscape – all of which are related in some way to
services.It’s key to embrace these
tenets within the context of our products and services.

1.The power of
the advertising-supported economic model.

Online advertising has emerged as a
significant new means by which to directly and indirectly fund the creation and
delivery of software and services.In
some cases, it may be possible for one to obtain more revenue through the
advertising model than through a traditional licensing model.Only in its earliest stages, no one yet knows
the limits of what categories of hardware, software and services, in what
markets, will ultimately be funded through this model.And no one yet knows how much of the world’s
online advertising revenues should or will flow to large software and service
providers, medium sized or tail providers, or even users themselves.

2.The effectiveness of a new delivery and
adoption model.

A
grassroots technology adoption pattern has emerged on the internet largely in
parallel to the classic methods of selling software to the enterprise.Products are now discovered through a
combination of blogs, search keyword-based advertising, online product
marketing and word-of-mouth.It’s now
expected that anything discovered can be sampled and experienced through
self-service exploration and download.This is true not just for consumer products: even enterprise products
now more often than not enter an organization through the internet-based
research and trial of a business unit that understands a product’s value.

Limited
trial use, ad-monetized or free reduced-function use, subscription-based use,
on-line activation, digital license management, automatic update, and other
such concepts are now entering the vocabulary of any developer building
products that wish to successfully utilize the web as a channel.Products must now embrace a “discover, learn,
try, buy, recommend” cycle – sometimes with one of those phases being free,
another ad-supported, and yet another being subscription-based.Grassroots adoption requires an end-to-end
perspective related to product design.Products must be easily understood by the user upon trial, and useful
out-of-the-box with little or no configuration or administrative intervention.

But
enabling grassroots adoption is not just a product design issue.Today’s web is fundamentally a self-service
environment, and it is critical to design websites and product ‘landing pages’
with sophisticated closed-loop measurement and feedback systems.Even startups use such techniques in
conjunction with pay-per-click advertisements.This ensures that the most effective website designs will be selected to
attract discovery of products and services, help in research and learning,
facilitate download, trial and purchase, and to enable individuals’ self-help
and making recommendations to others.Such systems can recognize and take advantage of opportunities to
up-sell and cross-sell products to individuals, workgroups and businesses, and
also act as a lead generation front-end for our sales force and for our
partners.

The PC has morphed into new form
factors and new roles, and we increasingly have more than one in our lives – at
work, at home, laptops, tablets, even in the living room. Cell phones
have become ubiquitous. There are a myriad of handheld devices. Set-top
boxes, PVRs and game consoles are changing what and how we watch television.
Photos, music and voice communications are all rapidly going digital and being
driven by software. Automobiles are on a path to become smart and
connected.The emergence of the digital
lifestyle that utilizes all these technologies is changing how we learn, play
games, watch TV, communicate with friends and family, listen to music and share
memories.

But the power of technology also
brings with it a cost.For all the
success of individual technologies, the array of technology in a person’s life
can be daunting.Increasingly,
individuals choose products and services that are highly-personalized, focused
on the end-to-end experience delivered by that technology.Products must deliver a seamless experience,
one in which all the technology in your life ‘just works’ and can work
together, on your behalf, under your control.This means designs centered on
an intentional fusion of internet-based services with software, and sometimes
even hardware, to deliver meaningful experiences and solutions with a level of
seamless design and use that couldn’t be achieved without such a holistic
approach.

The Opportunities

These three tenets are causing a shift in the software landscape
that started with consumers and is progressively working its way toward the
enterprise – changing how software is monetized, how software is delivered, and
what kind of software is ultimately embraced.With our presence in so many markets serving so many audiences, and with
such a broad variety of products and solutions, we are well positioned to
deliver seamless experiences to customers,enabled by services and service-enhanced software, including:

SEAMLESS
OS – The operating system as it would be designed for today’s multi-PC,
multi-device, work anywhere, web-based world.Enabling you to login using any of your service-based or enterprise
identities.Deploying software
automatically and as appropriate to all your devices, and roaming application
data and settings.Permitting seamless
access to storage across all your PCs, devices, servers and the web.

SEAMLESS
COMMUNICATIONS – Communications and notifications – from voice to typing to
shared screen; from PC to service-based agent to phone.Maintaining continuous co-presence with
intimate friends and family; improving the coordination amongst individuals who
need to work together by reducing latency and adding clarity through shared
context.

SEAMLESS
PRODUCTIVITY – Enabling you to create, find and organize documents and data
among all the desktops, devices, servers and services to which you have access,
and with all the others with whom you need to work, through ‘shared space’
products that are internet service-based, enterprise server-based and directly
peer-to-peer.Working within and across
homes, small businesses, virtual workgroups and enterprises.

SEAMLESS
ENTERTAINMENT – Enabling you to create, store, organize, present, consume and
interact with media of all kinds; accessing, caching and viewing it anywhere
you like regardless of where the media resides.Gaming experiences that bring two or two million people together across
PCs, devices and the web.

SEAMLESS
MARKETPLACE – Enabling you to research, find, buy and sell whatever you want
through a seamlessly integrated purchase, billing & payment & points,
advertising & lead generation & sales management system designed to satisfy
the needs of both buyers and sellers.

SEAMLESS
SOLUTIONS – Enabling workgroups and businesses to rapidly create and customize
any of a broad class of template-driven, semi-structured data-based
applications and solutions that “just work” and provide instant value – whether
using them from the web, from enterprise servers, or from mobile client PCs.

SEAMLESS
IT – Enabling enterprises to seamlessly and cost-effectively manage many of the
things they’ve classically done within their data centers – e.g. PCs,
messaging, content and applications.The
management experience might be wholly within the cloud, or with the cloud
seamlessly integrating enterprise server assist.

Moving Forward

In order to
adapt to the requirements underlying these key tenets, groups must reflect upon
their existing plans, and assess their designs in the context of the end-to-end
experiences they need deliver in order to understand how services might make a
substantive impact.Groups should consider
how new delivery and adoption models might impact plans, and whether embracing
new advertising-supported revenue models might be market-relevant.

In
assessing where we are and where we need to be, some new efforts will surely
require incubation.But in many areas we
have 80% of the product and technical infrastructure already built – we just
need to close the 20% gap.Following are
but a few thoughts for each division intended to catalyze a “services-enhanced
software” mindset.

Platform Products & Services Division

a.BASE vs. ADDITIVE EXPERIENCES – In MSN, and in Windows
Update and software deployed by it, we have quite a bit of experience with
methods and practices for getting innovations to market on a rapid cycle.In the form of a newly combined division, we
should consider many options as to how we might bring user experience innovations and enhancements to users
worldwide.Specifically, we should
consider the achievability, desirability, and methods of increasing the tempo
for both ‘base’ OS experiences as well as ‘additive’ experiences that might be
delivered on a more rapid tempo.In
doing so, we would better serve a broad range of highly-influential early
adopters.

b.SERVICES PLATFORM – Through years of experience, the
MSN team understands the methods and practices of building ‘internet scale’
services.The Platform team understands
developers and has deep experience in communications and storage
architectures.These teams must work
together, benefiting from each others’ strengths, to develop a next generation
internet services platform – a platform for both internal and external
innovation.A platform with capabilities
and an operations infrastructure that takes those services to a scale never yet
seen on the internet - to our benefit, and to the benefit of our partners and
customers.

c.SERVICE/SERVER SYNERGY – A tension has emerged between
our products designed for the enterprise and those for the internet.Exchange/Hotmail, AD/Passport, and
Messenger/Communicator are but three examples.All our enterprise clients and servers must interoperate with and
complement our internet services.Our
functional aspirations are generally “server/service symmetry”, but
architectural considerations dictate that different implementations may be
required to economically reach internet scale.We must quickly find the best path to achieve seamless user, developer,
and administration experiences involving servers and services.

d.LIGHTWEIGHT DEVELOPMENT – The rapid growth of
application assembly using things such as REST, JavaScript and PHP suggests that
many developers gravitate toward very rapid, lightweight ways to create and
compose solutions.We have always
appreciated the need for lightweight development by power users in the form of
products such as Access and SharePoint.We should revisit whether we’re adequately serving the lightweight model
of development and solution composition for all classes of development.

e.RESPONSIBLE COMPETITION –We will compete energetically but also responsibly and with
recognition of our high legal responsibilities.We will design and license Windows and our internet-based services as
separate products, so customers can choose Windows with or without Microsoft’s
services.We’ll design and license
Windows and our services on terms that provide third parties with the same
ability to benefit from the Windows platform that Microsoft’s services
enjoy.Our services innovations will
include tight integration with the Windows client
via documented interfaces, so that competing services can plug into Windows in
the same manner as Microsoft’s services.We will compete hard and responsibly in services on the basis of
software innovation and price – and on that basis we will offer consumers and
businesses the best value in the market.

Business Division

a.CONNECTED OFFICE - How would we extend or
re-conceptualize Office modules to fit in this seamless model of connectedness
to others, and to other applications?Should PowerPoint directly ‘broadcast to the web’, or let the audience
take notes and respond? How should we
increase the role of Office Online as the portal for productivity?What should we do to bring Office’s classic
COM-based publish-and-subscribe capabilities to a world where RSS and XML have
become the de facto publish-and-subscribe mechanisms?

b.TELECOM TRANSFORMATION - How should our investments in
RTC evolve to serve not just the enterprise, but also fully embrace the concept
of grassroots adoption?How can RTC
begin as an individual phenomenon, growing into a small business offering with
a level of function that they’d never imagine possible, growing into the
enterprise?How should we utilize
service-based federation and hosting to ensure a ‘just works’ experience for
all users, whether or not an administrator was ever involved?

c.RAPID SOLUTIONS - How can we utilize our extant
products and our knowledge of the broad historical adoption of forms-based
applications to jump-start an effort that could dramatically surpass offerings
from Quickbase to Salesforce.com?How
could we build it to scale to hundreds of millions of users at an unimaginably
low cost that would change the game?How
could we re-shape our client-side software offerings such as Access and Groove,
and our server offerings such as SharePoint, to grow and thrive in the presence
of such a service?Could these rapid
solutions encourage a new ISV ecosystem and business model?

Entertainment & Devices Division

a.CONNECTED ENTERTAINMENT - How can XBox Live benefit
from interconnection with other services assets, such as PC-based and
mobile-based IM and VoIP?How might both
the PC and XBox mutually benefit from a common marketplace?Might PC users act as spectators/participants
in XBox games, and vice-versa?

b.GRASSROOTS MOBILE SERVICES – How might the Windows
Mobile device experience be transformed by for consumers by connection to a
services infrastructure – in particular one enabled by RTC-based unified
communications?How might unmediated
connection to a rich services infrastructure transform mobile phones into a mass
market messaging, media and commerce phenomenon?

c.DEVICE/SERVICE FUSION – What new devices might emerge
if we envision hardware/software/service fusion?What new kinds of devices might be enabled by
the presence of a service?

What’s Different?

One
perspective on this memo might be to say “This is in many ways is pretty close
to what we’re already working on.What’s
the big deal?”Or “We tried something
similar years ago; why will we succeed this time?”These are understandable reactions.Many visions of the future going all the way
back to “Information at Your Fingertips” contain elements of what has been laid
out here.

That said, I
have a number of reasons for optimism that we can deliver well on this
vision.First, I know that Bill, Steve
and the senior leadership team understand that Microsoft’s execution
effectiveness will be improved by eliminating obstacles to developing and
shipping products.The recent
reorganization into three divisions is a significant step, and the division
presidents are committed to changes to improve our agility.

Second, we are just now completing a wave of innovation that has
never been seen in this company.2006 is
going to be an amazing year for shipping products, and many across the company
will be ready to take on a new mission.

Third, regardless of past aspirations, this is the right time to
be focusing on services for two specific reasons: the increasing ubiquity of
broadband has made it viable, and the proven economics of the advertising model
has made it profitable.It can be
argued, for example, whether or not Hailstorm was the ‘right’ undertaking.But regardless, the effort would certainly
have benefited from having a known-viable services business model for which to
design.

Finally, I
believe at this juncture it’s generally very clear to each of us why we need to
transform – the competitors, the challenges, and the opportunities.As an outsider, I was repeatedly impressed
and awed over the years by how this company’s talent has swarmed to effectively
respond to huge business challenges and transitions.

That said,
even when we’ve been solidly in pursuit of a common vision, our end-to-end
execution of key scenarios has often been uneven – in large part because of the
complexity of doing such substantial undertakings.In any large project, the sheer number of
moving parts sometimes naturally causes compartmentalization of decisions and
execution.Some groups might lose sight
of how their piece fits in, or worse, might develop features without a clear
understanding of how they’ll be used.In
some cases by the time the vision is delivered, the pieces might not quite fit
into the originally-envisioned coherent whole.We cannot allow the seams in our organization, or our methods of making
decisions, show through in our products, or result in the failure to deliver on
key end-to-end experiences.

Complexity
kills.It sucks the life out of
developers, it makes products difficult to plan, build and test, it introduces
security challenges, and it causes end-user and administrator frustration.Moving forward, within all parts of the
organization, each of us should ask “What’s different?”, and explore and
embrace techniques to reduce complexity.

Some problems
are inherently complex; there is surely no silver bullet to reducing complexity
in extant systems.But when tackling new
problems, I’ve found it useful to dip into a toolbox of simplification
approaches and methods.One such tool is
the use of extensive end-to-end scenario-based
design and implementation.Another
is that of utilizing loosely-coupled design of systems by introducing
constraints at key junctures – using standards as a tool to force quick
agreement on interfaces.Many such tools
are not rocket science: for example, by forcing a change in practices to
increase the frequency of release cycles, scope and complexity of any given
release by necessity is greatly reduced.Another simple tool I’ve used involves attracting developers to use
common physical workspaces to naturally catalyze ad hoc face-time between those
who need to coordinate, rather than relying solely upon meetings and streams of
email and document reviews for such interaction.Embracing change at a local level through
such tools can make a real difference – one project at a time.

Next Steps

We’re off
to a great start with many initiatives already under way – from efforts
occurring now within MSN, to the IW services being launched imminently.We’re in a tremendous position to succeed,
but doing so will require your belief, creativity, support, leadership,
follower-ship and action.

This memo
was intended to get all of us roughly on the same page, and to get you
thinking.The next steps are:

1)I
am working with the division presidents to assign, by December 15th,
“scenario owners” – a role intended to improve our execution of key services-based
initiatives through leadership.These
leaders will provide an outside-in perspective in mapping out and communicating
specific market objectives, while at the same time working with developers and
others at the detail level to ensure expedient decision making and
continuity.These individuals will be
responsible for driving critical decisions such as feature re-prioritization
and cuts while appreciating the business tradeoffs and impact of such decisions.They’ll listen.They’ll rapidly effect changes in plans to
ensure execution and improve agility, even for scenarios that span
divisions.Initial scenarios to be
assigned ownership will include the seven seamless experiences described
earlier.

2)Beginning
in January these individuals will work with me and with product groups to
concretely map out scenarios and pragmatically assess changes needed in product
and go-to-market plans related to services and service-based scenarios.For some groups this will impact short-term
plans; for many others on path to shipping soon, it will factor significantly
into planning for future releases.

3)All
Business Groups have been asked to develop their plans to embrace this mission
and create new service offerings that deliver value to customers and utilize
the platform capabilities that we have today and are building for the
future.We expect both technical and
non-technical communities to be increasingly engaged on the topic of services
and service-enhanced software.As we
begin planning the next waves of innovation – such as those beyond Vista and Office “12” – we will mobilize execution around
those plans.

4)I
have created an internal blog that will be used to notify you of further plans
as they emerge.There, I’ll point you to
libraries of documents that you will find interesting to read, and I’ll be
experimenting with ways that you can directly engage in the conversation.

These steps are important and necessary, but not sufficient,
for us to deliver on our aspirations.The most important step is for each of us to internalize the
transformative and disruptive potential of services.We must then focus on the need for agility in
execution, and take actions as appropriate where each of us can.

The
opportunities to deliver greater value to our customers, to our developer and
partner communities, and to our shareholders are significant.I very much look forward to embarking on this
journey with all of you.